Robin Henry reviews the case of Daniela Shurbanova v Forex Capital Markets Limited,[1] the High Court has held an FX broker was entitled to revoke trades under its contractual terms on the basis that the trades amounted to abusive trading.

The facts

FXCM Ltd (“FXCM”) was an online foreign exchange and commodities broker. It offered a number of trading platforms for retail and professional traders. One platform, the Dealing Desk (“DD”) was available to retail customers only. The DD had a number of features which differed from FXCM’s professional trader platforms:

it accepted smaller trades and would do so at more favourable prices than those available to professionals;

whereas prices on professional platforms changed rapidly in response to market events, the change in prices on the DD was deliberately slowed to allow retail clients more time to think about the trades they wanted to make. This slowing down of the change in prices is known as “throttling”; and

FXCM acted as counterparty on DD trades which meant that FXCM was at risk of having to pay out to customers on any losing trades. By contrast, on other platforms, FXCM’s trades were risk-free from its point of view because it did not act as principal but earned commission from passing the trades on to a “liquidity provider” (banks and other institutions operating behind FXCM).

In 2013, Mrs Shurbanova, the claimant, opened a DD trading account with FXCM. She engaged in a form of trading called “news trading”. This involves placing trades on the basis of the predicted outcome of a news event capable of influencing the currency markets. One such news event is the monthly US Non-Farm Payroll Date announcement (“NFPD”). This is an important indicator of non-agricultural jobs in the USA. When the number of jobs increases, generally the value of the US dollar will increase, which in turn will cause the value of gold to decrease.

Like other platforms which have a slower response time to news events, DD was open to abuse by traders who could place their orders immediately after the announcement of a particular news event, such as the NFPD, but before the platform’s prices were adjusted to take account of the news.

8 November 2013 was a day on which the NFPD was announced. On that date, Mrs Shurbanova placed contracts for difference on DD, selling gold and buying US dollars within a second of the news being released, with matching buy orders on gold and sell orders on the dollars seconds afterwards. In that short space of time, she made $384,210 on the gold trades and $79,200 on the dollar trades.

However, FXCM revoked the trades later that day on the basis that they had been made in breach of its term of business. FXCM claimed that Mrs Shurbanova had made a material misrepresentation in her account application and was really acting as a front for her husband, Alexander (“Mr Shurbanov”), who had been banned by FXCM for undertaking various trades in the past, and/or her son, Martin, who was also subject to restrictions on his trading with FXCM. Mrs Shurbanova denied she had been acting as a front and claimed damages against FXCM for the profits of the trades.

FXCM had previously alleged that Mr Shurbanov had used Forex News Gun (“FNG”) software which ‘reads’ news as soon as it is released. By also using his son’s software which automatically entered appropriate trades that would generate profits from the data as quickly as possible, a trade could be placed once the piece of news was known, but before the price was affected. This removed any element of risk from the trade.

Held

The Judge said it was clear on the evidence that Mrs Shurbanova herself did not know anything about trading and that she had been acting as a front for her husband and/or her son. She had used FNG and her son’s software to trigger the trades following the release of the NFPD.

When FXCM noticed there were significant discrepancies between the value of the trades placed by Mrs Shurbanova and the indicative value of the trades quoted on Bloomsberg, FXCM revoked the trades on the basis that they were made at a price which was a “manifest error” and that they amounted to “abusive trading”.

Manifest error

Clause 26 of FXCM’s terms allowed it to determine whether its quoted price was a “manifest error”. In determining this, it had to act fairly to the client but if it did determine there was a manifest error, it had the right to amend the terms of the trade. In this case, FXCM determined that the price quoted was so grossly off market that the manifest error was sufficient to require that the trade be revoked entirely.

The Judge held that the right to determine whether there was a manifest error gave rise to a potential conflict of interest, since it would be in FXCM’s financial interest to revoke on this basis. Even without FXCM’s express obligation to act fairly towards the client, this conflict of interest meant that FXCM was under a duty to act in a way which was not arbitrary, capricious or irrational (a “Braganza Duty”[2]).

In the Judge’s view, the trades could not rationally be described as manifest errors. Given that FXCM intended that the prices quoted on the DD should change slowly, it was impossible to see how FXCM could ever have quoted the “wrong” price. The fact that the quote was “off-market” did not mean that it was a misquote in the first place, otherwise all trades on the DD would be affected by the same manifest error.

Abusive trading

Clause 27 of FXCM’s terms prohibited “the deliberate practice of gaming and/or use of abusive trading practices on the Trading Facility. Transactions that rely on price latency opportunities may be revoked, without prior notice.”

The Judge considered that the trades were classic abusive trading. By using FNG along with the software that allowed Mrs Shurbanova to trigger the trades immediately upon receipt of the NFPD news meant that those trades were placed with knowledge of the outcome. They were not placed on predictions and there was therefore no risk. She was able to take advantage of the price latency inherent in the throttled prices offered on the DD.

Furthermore, the Judge concluded that, when considering whether abusive trading had occurred, FXCM did not owe the client a Braganza Duty. Instead, the decision here was whether to exercise an absolute contractual right to revoke the trades due to abusive trading. Therefore, no question of rationality needed to be considered in deciding whether the act constituted abusive trading, and whether to revoke such trades.

There was therefore no breach of contract in revoking the trades since, once abusive trading had been identified, it was at the discretion of FXCM to revoke.

Misrepresentation

The claimant gave contractual representations and warranties when she signed up to the account at FXCM, a number of which were false. Had the abusive trading argument not been sufficient to dismiss the claim, it was held that FXCM could have claimed damages for Mrs Shurbanova’s misrepresentations, cancelling out any liability owed to her.

Comment

This decision will be of interest to FX brokers operating online retail platforms. First, it makes clear that where brokers throttle their prices for retail-only customers, there can be no claim that there has been a manifest error in the pricing. Since the process of slowing the change in prices is intended, no error can have occurred.

Second, brokers will be able to revoke trades as abusive trading under their terms of business if retail clients seek to take advantage of the price latency inherent in “throttled” prices. FXCM was entitled to rely on its terms preventing retail clients from acting as professionals and making risk-free profits by placing trades with the benefit of high speed news feeds. Brokers may wish to review the drafting of their terms to ensure that they are allowed to make a simple decision whether to exercise an absolute contractual right to revoke, rather than having to assess or make a judgment between multiple different outcomes, which would subject them to a Braganza Duty to act rationally.